Without structural changes, flexible exchange rate policy will fail, says Nweze
Dr. Austin Nweze is an economist and a faculty member at the Pan-Atlantic University. Nweze, a governorship candidate of Ebonyi State in 2015, is passionate about the development of the country through deliberate industrialisation strategy. In this interview with CHIJIOKE NELSON and LUCKY ORIOHA, he applauded the new foreign exchange policy, but warned that the policy alone cannot work without restoring the lost economic fundamentals. Excerpts:
What is the flexible policy all about and your view about it?
What they are trying to do now is what they ought to have done. This is one of the things that we have been clamouring for. What they are trying to do now is to let people buy and sell at any rate. It’s all about forces of demand and supply. By this, Central Bank of Nigeria (CBN) has lost a great measure of monopoly over the foreign exchange market. Now, the official peg on the exchange rate has gone and everybody will now go and compete. It means that government’s earned dollar will be subjected to the market forces. However, CBN can at times use its discretion to intervene in any situation that it considers important to the economy. For now, we are still waiting for many details about the policy’s operations, including the determination of the price from which the interbank market will take off. But for me, the determination of this “fair value” of the Naira is another one that will create a loophole for the speculators to come back. They must be careful in determining that.
For me also, what actually they are going to do will depend on the details that would be unfolding. But going by previous experiences, I feel that CBN will still be the one that will make this policy not to work. CBN will come up through some little studs so that this policy will not work and that will depend on whose interest the whole idea stands to serve. Of course, every government policy is all about whose interest is being served. In any economy, the role of the monetary policy cannot solve the whole economic challenges. We will always need the fiscal side to have a direction, particularly the direction where the government wants the economy to go and then, the monetary side will compliment it. I have expected this a long time. In the first place, over the years CBN has had monopoly over foreign exchange, which is not supposed to be so. You can’t grow your economy when you have monopoly of the major means of productive activity. I have personally said that there should be a liberalised forex market, such that if I have dollars, I can negotiate what to sell. CBN has done its side of the deal, it is left for the fiscal authority to reciprocate.
What is the meaning of the futures trading as stated under the policy?
It is one of the three sets of strategies for players in that market. They are, sort of speculators, always reacting to hear rumours. They believe in rumours and make meanings in what they hear and immediately take position. It is not about hedging against future fluctuations in the price of the dollars and items. The establishment of the futures market for foreign exchange would allow businesses to hedge against future unpleasant movements in the exchange rates by locking into the current rate, thereby guaranteeing the availability of funds when needed in the future.
Of course, this will surely help to manage volatility and panic buying in the market as most businesses before now take pleasure in stockpiling dollars, which they have no immediate need for, but as a hedge against future undesirable fluctuations. If the rules are to be kept, things will work out well. Like CBN has agreed that proceeds of foreign investment flows and remittances will now be collected and sold to the primary dealers in the market, using the daily inter-bank rate. Again, the non-oil exporters will also have access to their forex proceeds, which invariably will be turned in at the inter-bank market. These measures, together with futures trading will bring about more supply and speculative attacks.
So, futures market transaction means that the agreement is fixed when you lock-in a price, whether the price goes up or down, it does not affect the transaction again. But it means that you have to pay upfront and the benefit for them is that they have taken the present value and whatever future value of the amount you paid now. So, that is what they are trying to do which is also good. However, while it will help to curb the speculation, it will not be 100 per cent. It is not a guaranty that the speculator will not want to rig the system, because they will still find a way of going around to make gain.
But generally,can the policy measure be described as a progress in respect of forex management?
Yes, there is a progress. That means you are deepening the financial system and Nigeria’s financial system can actually be integrated into the international financial system. But unlike in 2009 when the global financial system that the country was isolated in the immediate, now whatever happens everywhere affects us directly or indirectly. So, we are doing financial deepening, which has its own advantages and disadvantages, because the productive sector needs to be up and doing to be able to compensate for all of these. If we have an export-oriented policy, just like the Chinese did and we open up our system so that we will become more integrated in international market, then the naira will not be under pressure.
Is there a situation that will make us come back to naira peg again?
Of course, when our productive side is not rising and the naira is constantly beaten because we are not exporting, not even producing what we consume, that is where the challenges will resurface again. It is not about this policy alone, but about our ability to produce, especially what we consume. Go to all the major shops around, you will discover that over 75 per cent of their wares are not produced here. This is not good for the economy. We must be able to produce what we consume and that is the only way we can get around all these. I have told you that the monetary policy does not work in isolation. So, it is the fiscal side that will go back to rave up the system- the industrial sector to increase production for this monetary policy to make sense, otherwise, no matter how much policy you make without increased production, it will not make sense. You will still go back.
In your view, how sustainable is this single window?
The only way to sustain it is to go back to the production side and the fiscal policy side will have to show a direction where economy is headed, improve the ease of doing business. We must define the strategic way for the economy because it is not in the hands of Nigerians now and that is more dangerous. The fiscal side is where we have to work on so that we know the direction and how we can compete out there. The forex issue will not solve the problem because we still need to import what we consume. If we will produce at least 50 to 60 per cent of what we consume, that means the policy will be sustainable, otherwise all we are doing now is trial by error.
So, it looks like the strategy is symptomatic. What exactly do you think the economy needs to nip the situation in the bud?
Until the fundamentals are been taking care of. The economy on its own cannot grow- it requires the political institutions to give it the firepower it requires. The economy will keep on bleeding for as long as the political system that creates the strength to fire the economy continues to delay decisions or not knowing what to do. So, with the weak political institution that we have, the economy will keep on suffering. You can’t separate the economy from the political class. It has a big influence.
The infrastructure and economic policies are such that without a strong political institution, nothing will really function well. The political institution we have is lopsided in favour of only very few and we need a system that will provide justice, quality, equity and fairness. Malaysia had a similar situation. There are three major ethic groups in Malaysia, the Malays, Indians and Chinese. But the political side has been able to accommodate everyone and make policies that will allow different groups to express themselves. The Chinese, for instance, are mainly business people and they are the richest in Malaysia. The issue of hypocrisy is not there. So, until we solve that and allow everybody to express themselves, then the economy will not take shape. Till date, nobody has taken note of the opportunities that lie in ruins in Anambra, Abia, Kano and Ogun states. These are the things that will develop Nigeria’s economy because of their endowments- human and natural. That is the fiscal side under the political influence that I am talking about.
Now that diversification is the talk of the day, can we really increase production?
What we need to do now is policy choice. Every thing is about policy. If you have a right policy in place and implement it, the economy will respond positively. So, the thing is that to increase production, you will need to encourage industrialisation and to industrialise, we need energy, we need entrepreneurs and that is why I mentioned Anambra, Abia, Kano and Ogun states. Look at every state of the federation and local governments, they have at least two items of natural endowments that could also be used to build industries around. You don’t need to come to Lagos to become a big man, but you can stay in your village. So, when government is talking about diversification of the economy, they also have to consider centralising the economy, so that economic activities will be going on in all the nooks and crannies. So, that is the way to go about it but nobody is putting that in political space. Short-term thinking has never solved the problem. We need a strategic thinking, critical one.
Will these new measures put the currency hawkers of the streets?
I don’t think so in the immediate, but a sustained approach will. For now, they will still find jobs to do. They will not just by Monday, when the policy starts, go off the streets, because they still have some balances. First, let us ask and establish where the banks will be able to get the currencies and give to you. For now, you can’t even use your credit card outside Nigeria, unlike before. The basic travel allowances are still some issues, so we would have to wait and see the workings of the new policy.
The CBN will open up the system with the policy, but the Mallam will not go away soon. It is a consistent, sustained policy that will make them go away because they will not see where to get in touch with the currencies anymore. Then, they will find other jobs for themselves and again, don’t forget that if they cry to the ears of politicians that they are suffering, they might get a listening ear and one phone call to the CBN can make the change. So, if the interest groups are not affected so severelly, they will allow it to work, but once they discovered that it’s affecting them, they will lobby and this policy might change.
Is the redenomination of the naira an option?
Well, Ghana is not a successful story not minding the way you look at it, because it is not an export-oriented economy. It will only work if you have an export oriented economy. Ghana has tried it and at the end of the day, the status quo has returned and that is not sustainable. So, it does not work when you are just a consuming nation. For the redenomination of the naira, there is no need. China is competing because it’s manipulating its currency and is export oriented. What we are saying here is that they should not even bother about redenominating the naira. Let the productive sectors rise and then we will begin to export.
Nigeria’s economy is at least 79 per cent of the West African economy as a whole and even if we are saying that we are not taking the risk of expanding to other nations, we could just focus on Africa. When we do that, the naira will be trading officially in all those countries and that way, we will be able to say that the naira will begin to have some value.
What is your advice to monetary and fiscal authority?
The two must work together to increase production and every other thing will take place. The inflation targeting is what the CBN is using to aggravate the system all the more. You cannot contract the economy and expect growth. We must increase production in the short run alongside rising inflation and in the long run, both of them will merge and then inflation will begin to come moderate.
Do you think feeding ourselves will reduce the pressure we have on forex?
Once we can do 70 per cent or above 70 per cent of what we need, we are okay. You can’t be 100 per cent self sufficient but what we are saying here is that in the 80s, the contribution of manufacturing to the GDP was about 14 per cent, but today, it’s less than four per cent and that is why companies are leaving. Government policy would have been a simple one that will reduce the interest rate or give a long-term loan to entrepreneurs to buy the machine and produce here. Or better still, the beginning of our industrialisation is our capacity to produce and become original equipment manufacturers. We can begin like Hong Kong. For Nigerian to develop, we have to improve Aba and Nnewi, these are places that industrialisation will start. Asian countries did that by creating imitation of the items they buy. We can do it, even if we don’t sell the machines, we can use it for ourselves, until we develop the confidence and skills.
Would you have opted for a full devaluation?
Whether you like it or not, market forces will devalue a currency once it loses its fundamentals and for Nigeria’s case, the efforts in defending the naira are just mere waste of forex. That could have been used to do other things. In the 80s or in the 70s were all these things are happening? There is no way we can perpetually defend naira and everything now just amounted to waste your time. The fundamentals pushing the exchange rate were strong and the dollar was not coming in either. Even the current inflation is mainly cost-push in the sense that pump price of fuel went up and that affected every other thing. We don’t refine, we don’t have the dollar to buy and again, even the local refining was dubbed illegal, instead of thinking out a way to harness their efforts for good. The naira devalued itself because no currency stands aloof, it must be supported by fundamentals.